Equity Bank, Safaricom in clash that could affect Mpesa’s future

Kenya: The black swan theory provides an interesting way of looking at the business world. But for many entrepreneurs and corporate leaders, this theory — which describes an event that comes as a surprise and has a major effect — is yet to be ingrained in their way of life. And this is despite the fact that innovations that turn the world of business upside down often, if not always, come from “unexpected” quarters.

A black swan has landed into the Kenyan telecommunications market in the form of Equity Bank’s planned roll out of Thin SIM technology through its wholly owned subsidiary Finserve Africa.

What Equity Bank is planning to disrupt and dismantle is the dominance Safaricom has built in the mobile money transfer sector with M-Pesa, and the stranglehold it has in the telecommunications market. Many thought Safaricom’s lead in mobile money transfer services would be unassailable. Even the telco’s direct competitors in the industry — Airtel, yuMobile and Orange — have been unable to dent the firm’s dominance.

And going by a series of letters in Business Beat’s possession that were exchanged between the telco, Finserve and industry regulators, Safaricom CEO Bob Collymore is determined to defend his turf against an invasion by Equity.

Renewed rivalry

At the heart of the two firms’ renewed rivalry is a technology known as Thin SIM, which Equity plans to use to enter the telecoms industry.

The Thin SIM is essentially a thin layer of plastic with a circuit printed on it. A user can literally stick it on to an existing SIM card to continue accessing the original network, but with the added functionality of the secondary provider.

With the innovation, subscribers will not need to buy another cellphone or use a handset with dual slots. They also do not need to migrate to Finserve Africa’s network to use its financial services.

The Thin SIM can work alongside all four mobile operators in Kenya — Safaricom, Airtel, yuMobile and Orange.

Equity Bank is playing a tactical game, arguing that its eight million or so clients cannot afford having two phones, so a SIM card that just sticks on to the existing card on the same phone makes economical sense.

“Finserve’s services are targeted at poor people who cannot afford the luxury of a duo-SIM mobile phone but need to have access to at least two lines for their various needs and within their budgetary constraints. This need is currently not being met by any of the existing service providers, and that is the critical gap that Finserve seeks to fill through the roll out of the Thin SIM technology,” reads the letter from Finserve to the Director General of the Communications Authority of Kenya (CAK), Mr Francis Wangusi.

One product Safaricom jealously guards is its mobile money transfer platform M-Pesa. Apart from bringing in billions of shillings for the operator, the service acts as a powerful loyalty tool. The other mobile operators have long tried to lobby for Safaricom to open up M-Pesa to competitors.

Now, with the Thin SIM, that advantage could be eroded. With Equity Bank announcing that it will charge a maximum of Sh25 for any amount transacted, it could be a major assault on Safaricom’s money transfer business.

This has seen the telco petition the telecoms industry regulator to prohibit Equity from launching the technology in the Kenyan market.

In a letter dated June 26 and addressed to Mr Wangusi and copied to the Central Bank of Kenya governor and the managing director of Finserve Africa, Mr Collymore raised integrity and suitability concerns over the Thin SIM.

Technically baseless

But in a seven-page reply less than a week later, Finserve’s executive director, Mr John Waweru, termed Safaricom’s claims baseless and ill informed.

Mr Waweru was the immediate former Director General of the then Communications Commission of Kenya, which is now CAK.

“All the concerns expressed by Safaricom in its letter are technically baseless and should be disregarded,” said Waweru.

In what is expected to potentially open a new all-out fight for consumers, Collymore, in Safaricom’s three-page letter to CAK, detailed why the Thin SIM should not be launched in Kenya.

“The Thin SIM operates largely through its super imposition against an existing SIM card. It then intercepts the communication channel between the primary SIM card and the operating system of the mobile handset via the hard-wired circuit of the primary SIM card.”

Safaricom claimed the Thin SIM has the ability to intercept and distort communication between the mobile handset and the standard SIM card.

The telco also raises concerns that since the standard of communication between the Thin SIM and the primary SIM card have not been defined, there is a risk that the Thin SIM will infringe on the primary card’s property rights.

“Any use of a Thin SIM product should be with the express concurrence of the operator of the primary SIM card to avoid such potential infringement of Intellectual Property Rights. The concurrence of the operator will also ensure that security protocols are in place to safeguard the information on the SIM card,” Collymore said.

“We maintain that the Thin SIM should be subjected to a full risk review, no less than by the GSMA, to address all the security and service concerns in relation to its use. In the meantime, we call on the Communications Authority to prohibit its use in Kenya.”

But Equity Bank hit back: “A licensee like Safaricom should never be allowed to determine or dictate the technology that its potential competitors should or should not use. We submit that Safaricom has clearly overstepped its bounds in this matter by urging the regulator to prohibit the use of a competitor’s technology without sufficient knowledge of the product,” reads the letter signed by Waweru.

“The suggestions that we would want to maliciously and/or intentionally intercept or interfere with the primary SIM or the M-Pesa system is preposterous. If at all, M-Pesa’s security and its vulnerability is a task that firmly lies with Safaricom.”

Further, Equity Bank argues that there is no way it would be involved in unethical practices, and that the company providing the Thin SIM — Taisys Technologies Company Ltd of Taiwan — has a very reputable background. In fact, Waweru argues, the International Finance Corporation is a shareholder in Taisys, giving credibility to the technology the firm is rolling out.

Commercial deployment

Equity also dismissed Safaricom’s assertions and said the Thin SIM technology is not new as its first commercial deployment was done in 2006.

In the letter, Equity lists about 14 deployments of Taisys’ product, including in the United Kingdom through Cloud9, a mobile virtual network operator (MVNO), and two deployments in the US through Choice Wireless and GoToWireless. The firm also has commercial projects in Europe, North America, China, Singapore, Denmark, Brunei, Cambodia, Malaysia, Taiwan and Vietnam.

Equity dismissed the fraud concerns and said the Thin SIM is not designed or intended to interfere with, intercept or distort any communication between a phone handset and the primary SIM, saying subscribers would use Finserve’s network to access its services.

“The Thin SIM does not technically have the capacity to hack or crack the services and connections of the primary SIM or any meaningful encryption or security mechanisms by itself. It cannot remotely connect to outside sources for additional resources without the user noticing,” Waweru said.

He added that Taisys has been a GSMA member since 2007, and that it complies with the required European Telecommunications Standards Institute (ETSI) standards.

“Safaricom’s contention that the Thin SIM is not sanctioned by either the ETSI or the GSMA is completely incorrect.”

The firm attached a certificate showing Taisy’s membership to the GSMA, an association of mobile operators and related companies devoted to supporting the standardising of standards set by ETSI.

Vigorous testing

On whether, the Thin SIM affects the quality of service of the primary SIM, Waweru said the technology works independently as a standard SIM card if the subscriber switches to it.

“Our supporting operator, Airtel Networks, has vigorously tested the working of the Thin SIM on its network and can confirm that it neither interferes with nor intercepts communication between the mobile handset and the primary SIM, nor affects the quality of service provided to its end users.”

Waweru said the introduction of the Thin SIM into the Kenyan market fosters competition and places an obligation on existing operators to provide high quality services.

Analysts see the technology as a serious threat to Safaricom’s dominance.

“If Equity can leverage its massive customer base to adopt [the Thin SIM] — an easy way would be to offer it free to all customers, with incentives for adoption — it would, in the medium term, pose a serious threat to Safaricom,” said Mr Peter Wanyonyi, a telecoms analyst.

But, he said, this would depend on how Equity rolls out its services, how acceptable the SIM would be to merchants and how many money transfer agents it can get quickly.

“The problem for Safaricom is mainly that Equity, with its massive customer base, will ensure Equity account holders get a money transfer service equal to or better than Safaricom’s own M-Pesa. The network-agnostic nature of the service means that in short order, Safaricom would have a competitor with a key advantage that it lacks: full cross-platform functionality. This is what Safaricom is afraid of,” Wanyonyi said.

Massive panic

“Safaricom is, to put it bluntly, in a massive panic. This is totally understandable. The market leadership of Safaricom in Kenya is owed mainly to two factors: the ubiquity of M-Pesa, and the difficulty — which is both economic and cultural — of getting customers to purchase a second phone.”

He added that there is no risk of the Thin SIM intercepting messages sent to the primary SIM card, and the charge that it could somehow hack the primary card does not make sense.

“One senses that Safaricom wants to delay the Thin SIM project for as long as possible — hence the call for GSMA to investigate the technology. It should be added that, given the Thin SIM is already active in many markets, the call for GSMA investigation looks like a desperate gambit that takes no cognisance of facts on the ground. In the absence of other technical concerns, there is nothing for the CAK to look at here.”

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